Andy Hagans sits down for an interview with Kevin Carter, the founder of EMQQ.
All Emerging Market’s Editor in Chief Andy Hagans recently interviewed Kevin Carter, the founder of EMQQ (The Emerging Markets Internet & Ecommerce ETF). Mr. Carter was previously founder and CEO of AlphaShares, which offers emerging markets ETFs in partnership with Guggenheim Investments. The interview was completed over email in early May of this year.
Andy Hagans: When did the idea to launch EMQQ originate? How long did it take to bring it to fruition? (Note to readers: the ETF began trading in November 2014.)
Kevin Carter: It’s hard to put an exact date on it. I’ve been watching the growth of e-commerce in China for several years. In fact, I helped Guggenheim Investments launch a China Technology ETF (NYSE: CQQQ) in 2009 with the specific intent of providing exposure to Baidu and the other Chinese Internet companies that were experiencing tremendous growth. In 2012, we began to broaden our focus from “China-only” to all emerging markets, and a few companies caught my attention. The first was MercadoLibre (NASDAQ: MELI), which is often called “The Amazon.com of Latin America.” In reality, it’s more like that plus “the eBay and PayPal of Latin America.” Another was Yandex (NASDAQ: YNDX), “the Google of Russia.” What bothered me was that because they were listed on U.S. exchanges, MELI and YNDX were not in the major ETFs like EEM and VWO. Last summer was when I had the “lightbulb” moment for putting the ETF together. After that, the actual process of bringing it to market only took a few months.
Andy Hagans: How might this fund’s asset class fit into a relatively vanilla, 60/40 type portfolio?
Kevin Carter: For most investors, emerging market equities are typically a small portion of the 60 percent invested in equities. So, let’s say you put one-quarter of the equity allocation, 15 percent, into emerging markets. If that’s your allocation, I think at least 5 percent should be invested in the Internet and e-commerce sector represented by the EMQQ Index. Here is why I say that: for starters, remember that the primary reason to invest in emerging markets is for growth and exposure to the rise of consumption. One can make a pretty strong case that these e-commerce companies are the best way to invest in the growth of the consumer class. Just look at the revenue growth. The companies in the EMQQ Index have averaged 41.5 percent for the past five years and were still a healthy 39.9 percent in 2014. I think investors in this sector also gain from better corporate governance than the hundreds of large state-owned enterprises that dominate the traditional broad-based ETFs. Another reason I am comfortable with the 5 percent is that, as I mentioned, most of the companies in the EMQQ Index are not in the major ETFs, so in some ways, you are filling a hole in your portfolio.
Andy Hagans: Last year, you mentioned that emerging markets comprise 50 percent of global GDP and 80 percent of the global population but makeup under 3 percent of the average U.S. investor’s portfolio. How quickly is this dissonance being corrected?
Kevin Carter: Not quickly enough. All things being equal, I’d say no more than 0.25 percentage points annually — meaning if the average is 3 percent now, it might be 3.25 percent next year. It’s really a glacial pace, but it is happening. For example, the Harvard Endowment has gone from a 6 percent allocation to emerging markets in 2005 to an 11 percent allocation in 2015. That’s an average increase of about 0.5 percentage points annually — and Harvard is a sophisticated and relatively progressive investor.
Andy Hagans: The growth of AUM in the ETF universe has been amazing. Some of this has been driven by plain-Jane funds from the big guys — Vanguard, BlackRock, Schwab. But many smaller companies have launched ETFs based on unique investing theses, as well. Do you think there are many remaining opportunities for novel ETFs to track niche asset classes? Or is this level of granularity getting close to reaching its peak due to the logistical and economic challenges of launching an ETF for a niche asset class?
Kevin Carter: I think you are correct that most of the core asset classes have been pretty well covered. What you are seeing now are new thematic offerings and, at least from the larger players, a lot of so-called “smart beta” ETFs. On the logistics and economics side, I think the challenges of the past have actually gotten a lot easier. Several viable white-label providers now make it extremely easy to launch an ETF both quickly and cost-effectively. So now, an entrepreneur with an idea can get to market without a significant amount of capital. However, the challenge remains to find a niche that can attract the assets required to generate sufficient revenue to cover ongoing costs. Just getting the ETF launched does not ensure success.
Andy Hagans: Do you have any favorite travel destinations located “in the emerging markets”?
Kevin Carter: Earlier this month, my family and I spent spring break in Yangshuo County, China. It’s located in Guangxi province in the southern part of the country and is sort of a “Yosemite” of China in that it’s a place of great scenic beauty. There are rivers and incredible mountains, and it’s a great place to hike and bike around the countryside. I highly recommend it for anyone that travels to China and wants a break from the large cities. But go soon. The incredible growth of domestic tourism in China is changing Yangshuo in a very commercial way.
Postscript from Andy Hagans: Interesting answer — I have also been to Yangshuo (in 2004, during my studies abroad). What beautiful mountains!
About the Author: Andy Hagans
Andy Hagans is the Editor in Chief for All Emerging Markets, and also serves as the CEO of parent company Poseidon Financial. He is passionate about the “Bogleheads” school of investing, and is focused on helping investors achieve higher net returns via tax efficiency and fee minimization. He resides in southwest Michigan.